How North Korean trading companies make money

SEOUL – One of the most important peculiarities of the North Korean economy is the existence of numerous Foreign Currency Earning Companies (FCEC) that, usually with flowery Chinese-style names, sell resources to China, and import consumption goods to North Korea.

Most communist states historically followed the Soviet model that made foreign trade the nearly exclusive preserve of a particular branch of the central government – typically this branch was known as the ‘Ministry of Foreign Trade’. All exportable items had to be submitted to this ministry which in turn negotiated and made deals with overseas partners. This highly centralized system of foreign trade was established in the Soviet Union under Lenin and was ideologically ‘blessed’ by the founder of world communism himself.

However, as early as the 1970s, North Korea began to move away from this Soviet-style system. A number of government agencies were given permission to establish their own foreign trade companies that operated with remarkable autonomy and with very little control from central government bureaucracy. The number of Foreign Currency Earning Companies increased dramatically in the late 1990s. The exact total number of FCECs is not known, but is estimated at around 200-250.

TRICKS OF THE TRADE

Most of the FCECs are established by the bureaucratic agencies, many of which at first glance have little to do with foreign trade or even manufacturing. The largest and most powerful FCEC are run by the Party and by the military, while the FCEC fathered by police agencies and intelligence services are also quite significant. In practice, every single one of these power agencies has not one but several FCECs under its control. Frequently, powerful departments within these state agencies run their own FCEC.

Within the Ministry of People’s Armed Forces the Department of Intelligence runs the Pirobong Foreign Trade Company, the Department of Roads runs the Unhasu Trade Company, and the Department of Mobilization runs the Ryonghun Foreign Trade Company. The Korean People’s Air Force and Navy also operate their own foreign trade companies.

Initially, the emergence of FCECs was related to the ‘spirit of self-reliance’, which was so vigorously extolled in North Korean ideology of the 1970s and 1980s. It was assumed that FCECs would provide parent agencies with the necessary foreign currency needed to purchase necessary equipment and undertake finance-related activities. To a certain extent, FCEC funds are indeed used for such purposes. However, FCECs have also clearly become a source of enrichment for the upper bureaucracy within the relevant agencies.

FCECs face a major challenge: the North Korean economy has little to offer to the international market.

North Korean exports are completely dominated by mineral resources, seafood and medicinal herbs, as well as by some exotic goods – frog oil, for example, a substance which is extracted from a particular species of frog. Most of such items are exported to China which now controls well over 80% of North Korea’s foreign trade.

WACKY WAKHUS

Since most bureaucratic agencies do not produce anything sellable at all, the FCECs under their control are usually given the right to harvest or collect particular natural or mineral resources in a particular area, usually around their local office. One FCEC can be given the right to, say, export dry squid, while another might be allowed to deal in pine mushrooms, for example. Every FCEC is issued an export license or quota for a particular kind of merchandise called a wakhu. The origin of this term is unclear, but it has been around since the late 1970s, and might be a corruption of a Chinese or even Russian term.

FCECs actively trade unused quotas between themselves (for a hefty fee, obviously). So, if a particular FCEC got, say, 100 tonnes of exportable-quality squid, but have no wakhu for this merchandise, it looks for another company which has secured a proper wakhu for exporting squid, but has failed to obtain the squid itself.

A deal is then made, with the wakhu owners being paid commission for the right to use its quota.

‘TONJU’: MASTERS OF MONEY

A peculiar feature of the North Korean economy is the increasingly blurred line between state and private income-generating activities.

This line is particularly blurred within FCECs. In most cases, bureaucrats within an FCEC parent organization have a lot of power but almost no money. They can usually secure export and extraction quotas, but they do not have the means to collect or buy the goods – and goods, be it mushrooms, coal or gold have to be either purchased at the local market, harvested or mined. This is where private investors come into play.

In most cases, FCEC bureaucrats work together with North Korea’s nascent bourgeoisie, known as the tonju (lit. ‘master of money’).

The latter typically use their own money to buy the exportable items from local producers. In more complex schemes, a tonju might invest in a mining enterprise, so he or she essentially ends up running a private mine. In such a case, a tonju will hire workers, purchase equipment, arrange transportation, and even commission geological surveys.

In exchange, a tonju is given a measure of protection because his operations are ostensibly part of the government economy. In some cases, tonju might receive help from the police and other powerful government institutions and usually become official staff members of the FCEC. If the particular FCEC is part of the military, police, or security services, they might even be issued military ranks too.

A tonju entrepreneur might deal with harvesting or mining exportable resources, but in many cases he or she might also use connections in China to arrange the sale of said resources. Of course, legal sale is only possible if the FCEC has the wakhu quotas to hand.

In exchange for access to export quotas and a modicum of legal protection, private entrepreneurs are supposed to pay the FCEC central offices an agreed amount of money. Additionally they must also pay kickbacks to their partners and protectors in the bureaucracy. Without doing so, they would be unable to continue this lucrative work.

After obligatory payments to the state budget and the equally obligatory payments to bureaucratic partners are made, the rest goes to the tonju. This is profitable, so many of the Tonju prefer to work within the FCEC system.

OVERSEAS OPERATIONS

Even if an FCEC’s operations are handled by bureaucrats and not the tonju, a remarkable amount of autonomy is given to its personnel. It is normal for an overseas (in nearly all cases, Chinese) office or even an individual manager to be given an annual obligation, usually denominated in US dollars. After the office or individual pays the amount required, they are free to keep any other money they can earn.

FCECs can also make money by importing items for resale, as well as exporting items to China (other countries are far less significant. The majority of these items are typically mass-produced consumption goods that are bought by FCEC representatives in China and then shipped to North Korea for resale to private wholesale merchants.

Some FCECs are also charged with buying particular luxury goods for the elite. It appears that in most cases such luxury goods are bought not for profitable resale but as a kind of obligatory tribute that every FCEC is supposed to give to the state.

In most cases, such tribute takes the form of money transfers, but in some cases, ostensibly, bottles of expensive cognac or even a Mercedes can be provided in lieu of such transfers.

Predictably, this system leads to a great amount of corruption. Chinese companies frequently report that their North Korean partners ask them to include into a contract an inflated or deflated price, or misreport the amount of goods delivered. Such techniques are often the only way for low-level managers to make some money for themselves.

At the same time, such managerial freedom has created an entrepreneurial class. It also has helped to bridge the gap between private entrepreneurs, the tonju, and the bureaucracy.

This may have far reaching consequences for North Korea in the future.

About the Author

Andrei Lankov

Andrei Nikolaevich Lankov is a Russian scholar of Asia and a specialist in Korean studies. He completed his undergraduate and graduate studies at Leningrad State University in 1986 and 1989, respectively; He also attended Pyongyang's Kim Il-sung University in 1985. Following his graduate studies, he taught Korean history and language at his alma mater, and in 1992 went to South Korea for work; he moved to Australia in 1996 to take up a post at the Australian National University, and moved back to Seoul to teach at Kookmin University in 2004. Dr. Lankov has a DPRK-themed Livejournal blog in Russian with occasional English posts, where he documents aspects of life in North (and South) Korea, together with his musings and links to his publications. He also writes columns for the English-language daily The Korea Times.